About a quarter of new oil projects in Canada could be under threat if oil prices fall below $80 U.S. per barrel, the International Energy Agency warned in a report Tuesday.
With Brent crude prices tumbling from a high of $115 U.S. earlier this year to around $86 U.S. today, many analysts have been warning that some oilsands projects — which have among the highest production costs of any oil fields around the world — could be in trouble if prices fall further.
Western Canadian oil was trading at around $81 U.S. per barrel on Wednesday.
About three per cent of the world’s oil projects would become unprofitable with oil below $80, the IEA said in its latest oil market outlook, with Canada, Norway, Brazil and Angola taking the brunt of it.
"Canadian synthetics (oil sands) projects have the highest percentage of production of the types examined here (about 25 percent) that would fall into a negative net present value if there were to be an extended period of prices below that level," the report said, as quoted by Reuters.
By comparison, only about four per cent of the U.S.’s booming shale oil industry would be affected by prices below $80, the report said.
With weakness in China’s economy and talk of a triple-drip recession in Europe, the IEA revised its forecast for oil demand downward. It now expects oil demand to grow by about 1.1 million barrels this year, down from 1.4 million.
The problem for Canada’s oil producers could be compounded by the fact that Saudi Arabia has signalled it wants to keep oil prices at around $80, as part of a strategy to push out some other players and regain its market share.
While it's believed Saudi Arabia's move is meant to slow expansion of the U.S. shale oil operations, the move is likelier to impact Canadian operations because of the higher costs involved.
As the largest oil producer in OPEC, Saudi Arabia has considerable clout in setting global oil prices.
The IEA’s warning about Canada echoes one made by CIBC last week. Economist Peter Buchanan said investment in the oilsands could drop off very quickly if oil prices fall below $80.
Despite the fact that falling oil prices have translated into significant declines in gas prices for Canadians, Buchanan said the falling price of oil was a slight net negative for Canada.
He estimated that a 20-per-cent drop in oil prices translates into a 0.1 or 0.2 per cent drop in Canada’s GDP in the following two quarters.
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